Ever heard of a lease-to-purchase-property? Many of us would say that a residential lease purchase agreement is simply a rent-to-own contract. While this is true, it only describes a brief overview of what a lease purchase contract is all about. Although the real estate market is getting stronger, lease purchase agreements are still a highly viable way to buy into property as well as sell them. This is a monthly payment contract. Let’s take a look at a typical scenario revolving around the lease purchase contract:

Mark contracts with Larry to buy Larry’s house on a lease purchase. The terms of the lease purchase guarantee a sales price of R1,000,000, and a rental rate of R10,100 per month. Larry also guarantees that R2500 per month will be credited toward the purchase of the home at a later date. At the end of the lease period, Mark has the option to buy the house. If he doesn’t, Larry is able to keep the R2500 per month that would have been contributed to the down payment of the house.

The Buyer’s Perspective

This is a good situation for a buyer that doesn’t have the cash to buy a home. Bit by bit, the buyer can pay towards the down payment of the house, and then close on it at a later date. Also, this gives a potential buyer with less than perfect credit a chance to develop a stream of solid payments, thus being more attractive to a bank or mortgage company when it comes time to close on the property.

As a buyer, this is a great way to guarantee a property for no money down, while you attempt to get the money and credibility to own at a fixed price.

The Seller’s Perspective

From the viewpoint of the seller, this strategy, should only be considered if the lease option is not possible. It does have its benefits, such as being able to charge a little more rent than you might get otherwise, but other than that, it isn’t much different than renting, while also having to guarantee a sales price in the future. Another potential benefit is, if the buyer doesn’t have enough money to put down up front (like in the lease option scenario), they sometimes are likely not to be able to continue making timely payments, and you can then keep the additional rent, and then resell the house.

But we advise going the Lease Option first to gain commitment and to ensure future intent from the buyer to own, you want to see some money up front.

In short, as a seller, this strategy should be used with caution. In slow markets, or in markets where you just can’t find a buyer with any money to put down on the house, then consider this idea. The lease option is a far superior method to the rent-to-own concept. Get some money up front, let the buyer bail later, keep the option fee, and resell the house.